The United States’ Securities and Exchange Commission (SEC) claimed it has the power to prosecute crypto influencer Ian Balina not only because his case involves U.S.-based Ethereum transactions, but also because the whole Ethereum network comes within the jurisdiction of the US government.
Jurisdiction belong to US government?
When the SEC filed a federal lawsuit against Balina for failing to register a cryptocurrency as a security prior to launching an initial coin offering (ICO) in 2018, everything initially appeared routine: the SEC has, for years, filed civil lawsuits against individuals and organizations for launching unregistered ICOs.
However, in its complaint, the regulator observed that the ETH delivered to Balina was “validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country. As a result, those transactions took place in the United States.”
Since more validating nodes for Ethereum are now operating in the United States than in any other nation, the SEC seems to be arguing that all Ethereum transactions worldwide should be regarded to be of American origin.
Currently, according to Etherscan, 45.85 percent of all Ethereum nodes operate in the United States. Germany has the second-highest density of nodes, at 19%, behind Japan.
SEC and Ethereum transactions
If the SEC were to successfully designate Ethereum behavior as comparable to that of a U.S. stock market, it would equate to the regulatory agency asserting control over all activity on the purportedly decentralized Ethereum network.
In the hours after Ethereum’s successful shift to a proof-of-stake consensus mechanism last week, SEC Chairman Gary Gensler hinted that the change may move the network closer to the government’s definition of a security.
Security or decentralized?
Gensler provided his opinion on how “staking” (i.e. pledging assets to a crypto network in exchange for passive rewards) could be interpreted as an indication that an asset qualifies as a security under the so-called Howey Test, without mentioning any particular cryptocurrency or network by name.
Despite leadership within the Commission during the previous administration indicated that Ethereum was “sufficiently decentralized” and hence not a security, the SEC has yet to adopt a formal position on the cryptocurrency under Gensler.